The ultimate smackdown: exponential technological progress vs. exponential stupidity at the Federal Reserve

Introduction

In reading Will Durant’s Story of Civilization, one of the things that jumps out at me is the way that the decline and fall of every world empire seems to proceed along the same lines. Transcendental moral values are replaced by ad-hoc relativistic ones, birth rates take a dive, nationalism spikes, and the kings debase the currency by mixing in some worthless metal with the gold.

In thinking about  our own civilization, however, I’m torn. We’ve mostly completed the checklist, and seem to be well on our way to cyclical historical doom, and yet something in me (maybe something arrogant, stupid, and nationalistic) says “But what if this time is different?, What if this truly is “The End of History“?”.

Lewis, in That Hideous Strength, seems to have come to this conclusion by reckoning  that because our wicked empire has become global, there are no barbarians waiting at the gates to give us our much deserved coup de grâce.  (Interestingly, in his novel, Lewis has God step up to the plate and do the eradicating supernaturally in the absence of the much-missed barbarians.)

While this issue is so gargantuan and interdisciplinary that it would be impossible to design an experiment to test it, one facet of the problem that we might be able to explore quantitatively is the debasement of our currency. Inflation (or the deliberate debasement of our currency by printing more and therefore reducing the value of every dollar in circulation) is a kind of hidden tax. It usually runs rampant near the end of a civilization’s life, and it has been running rampant as of late.  As of December of 2008, the Federal Reserve has made the unprecedented move of adopting something called a “Zero Interest Rate Policy” or “ZIRP”, which means that they are now running the dollar-presses at full capacity, in an attempt to produce, as best they can, an infinite flood of money and infinite inflation.

Enter Ray Kurzweil. Kurzweil is a lunatic or a genius, depending on who you ask, who has been agitating for precisely this move since well before current economic crisis. Why? Because Kurzweil believes that we are living in an unprecedented kind of century, where the explosion of information technology is acting as a DEflationary force which we should be counteracting by printing more money. Kurzweil started making these recommendations in 1987, when he wrote a book predicting the fall of the Soviet Union, the explosive growth of the internet, and the defeat of the world champion chess player by a computer.

It’s  well-known that technological progress causes deflation. If I can build a better factory that produces T-shirts with half the costs in electricity and labor, you can buy a T-shirt for half the price. In the macrocosm, this means that your money can potentially seem to buy more every year. This effect seems to be more pronounced in information technologies (digital watches used to cost a thousand dollars and now they’re given away free with happy meals), but Kurzweil says that everything is becoming an information technology. In 1987, he predicted that this universal exponential deflation would become so pronounced that people would start to notice it and talk about it . . . in roughly 2009.

So I propose to do the following.

Methods

I intend to calculate inflation like Ron Paul does: by looking at the money supply. Now this becomes problematic, because in order to mask their malfeasance, the Federal Reserve stopped reporting how much money it was creating in 2006 (Yes my friends, it’s getting bad).

I intend to calculate the forces of deflation by looking at the cost of various items (bread, salt, etc.) over the years, and then taking the difference between these prices and the prices one would expect due to the increase in the money supply, and crediting this to the deflationary force of technological progress. Now this is problematic too. There are other factors at play, perhaps most importantly that the U.S. dollar is being used as the world’s reserve currency, and other nations (particularly China) are hording the stuff, and artificially driving up the value of the dollar.

We will hope that these things notwithstanding, I may find some truth. The question that plagues me is this: If we can plot, roughly, the rate at which we are debasing our currency, and the rate at which technology is reinvesting it with value, which curve will win? Does it look like we’re in for a technological deus ex machina, or are we just like every other arrogant dead empire?

Results

The trend of the reinvestment of our currency with value- -be it by Chinese hoarding, technologically driven deflation, or whatever else- -while being so substantial as to keep us from living in a hell world where our dollars would be worth today’s dimes, is so far from being exponential or anything like it that I didn’t even bother to do linear regression:

Yes, friends, the force of our would-be salvation is the green line. I have to say that I’m glad that I don’t live in a world where the value of the dollar is determined completely by money supply though. Just look at that atrocious blue place at the bottom where we might be.  The following chart depicts just how much of our dollar’s current value can be attributed to our magic deflationary forces:

There are some caveats that ought to be made.  For one, Kurzweil sees our magic deflationary force really only starting to become a significant issue now, making our historical analysis of trends from 1959 to 2006 quite useless. Another techno-utopian I’ve read, named Virginia Postrel, argues that the Consumer Price Index that I’m using is all out of whack, as it equates a 1905 Ford vehicle with a modern one that goes ten times as fast, or a 1980 computer with a modern one.

My optimistic guess is that they’re both probably right, but it’s not enough to keep me from being terrified at what I see. Personally and practically, what I’ve taken from this study is the idea that winning independence from the monetary system is a better strategy, at least in the short term, than buying into it.